Key facts
- Wall Street banks are now feuding over a proposed change to the Federal Reserve's capital surcharge for global systemically important U.S. banks (GSIBs).
- The proposed change revises how short-term wholesale funding is treated, which could benefit banks more reliant on it, like Goldman Sachs and Morgan Stanley.
- JPMorgan and Bank of America estimate they would receive less capital relief under the proposal compared to their rivals.
- JPMorgan and BofA argue the change could incentivize trading over lending, while Goldman and Morgan Stanley contend it enhances risk sensitivity.
- The Federal Reserve is aiming to finalize reforms before potential increased oversight from Democrats in the House of Representatives.
Wall Street's largest banks, which had previously united to advocate for relaxed capital rules, are now in conflict as the Federal Reserve nears the finalization of its sweeping capital rule overhaul. The dispute centers on a proposed adjustment to the capital surcharge imposed on global systemically important U.S. banks (GSIBs).
The Federal Reserve's March proposal aimed to make the surcharge more risk-sensitive, particularly by revising how it treats short-term wholesale funding. This change, however, has created a rift between major lenders.
JPMorgan and Bank of America, which rely heavily on stable deposit funding, view the proposed tweak unfavorably. They estimate that this specific change would result in them receiving billions less in capital relief compared to what they would have otherwise received under the broader overhaul. JPMorgan projected missing out on $13 billion, while Bank of America anticipated missing $9 billion.
Conversely, Goldman Sachs and Morgan Stanley, which are more dependent on short-term wholesale funding, stand to benefit from the proposed revision. JPMorgan's analysis suggests these two banks could realize an additional $1 billion to $2 billion in capital relief. Advocacy group Better Markets has also concluded that Goldman and Morgan Stanley would benefit the most.
This divergence has led to intense lobbying efforts. JPMorgan and Bank of America executives are reportedly urging the Fed to discard the proposed funding tweak, arguing it could reduce lending to the real economy and potentially boost riskier trading activities. JPMorgan's business banking chief, Stevie Baron, stated in a blog post that the proposal would incentivize trading over lending to small businesses.
Goldman Sachs and Morgan Stanley, on the other hand, are pushing for the swift finalization of the change, asserting that it would lead to a more transparent and economically grounded measure of risk. Public records show that executives from JPMorgan and Morgan Stanley have met with Fed officials multiple times since March to discuss the GSIB proposal.
The Federal Reserve developed the GSIB surcharge after the 2007-2009 financial crisis. The banks had long argued that the existing surcharge was too stringent and did not adequately measure risk. The current proposal seeks to simplify the measurement of short-term wholesale funding, moving from a ratio of risk-weighted assets to a direct measurement of absolute exposure. Data indicates that short-term wholesale funding constitutes a larger portion of liabilities for Morgan Stanley and Goldman Sachs compared to JPMorgan and Bank of America.